(Alison Frankel writes the On the Case blog for Thomson Reuters News & Insight newsandinsight.com. The views expressed are her own.)
By Alison Frankel
NEW YORK (Reuters) - From the beginning of the criminal prosecution of Rajat Gupta, it was clear that the government didn’t have the sort of evidence usually at the heart of insider trading cases. Gupta didn’t profit directly from the tips he allegedly passed to Raj Rajaratnam, who has since been convicted of inside trading.
In fact, as his lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel has said repeatedly, Gupta lost millions in his investment with Galleon, Rajaratnam’s hedge fund. That evidentiary gap has left space for Naftalis to argue that the government unfairly targeted his client because of Gupta’s high profile as a former head of McKinsey and director at Goldman Sachs (GS.N). It also puts pressure on prosecutors to link Gupta directly to Rajaratnam’s tainted trades, since nothing else shows he was part of the conspiracy.
As Gupta’s May 21 trial date fast approaches, the latest filings from both sides disclose exactly how the government intends to establish that link, using phone records and wiretap evidence to show that Rajaratnam traded specifically because of tips he received from Gupta.
But the new briefs also spotlight the inferences prosecutors will have to ask jurors to draw. The government’s case leans heavily on wiretapped conversations in which Rajaratnam tells associates at Galleon what he found out in alleged phone conversations with Gupta that were not taped by the government. Prosecutors argued in a motion last week that Rajaratnam’s taped calls with Galleon conspirators fall under an exception to the rule barring hearsay evidence. If U.S. Senior District Judge Jed Rakoff disagrees, the government will have a much tougher time convincing jurors that Rajaratnam’s inside information came from Gupta.
The prosecution’s latest bill of particulars against Gupta includes allegations that Gupta tipped off Rajaratnam about Procter & Gamble (PG.N) news (Gupta was also a director there). But the government’s strongest evidence appears to involve two alleged Goldman tips. The first alleged tip came on the day in September 2008 that Goldman Sachs directors learned of Warren Buffet’s $5 billion investment in the bank.
Moments after Gupta disconnected from the board’s conference call, his assistant placed a call to Rajaratman, according to phone records. After that very brief call, which concluded only minutes before the end of the trading day, Rajaratnam placed orders to buy as much Goldman Sachs stock as he could snap up. He ended up paying about $25 million for more than 200,000 shares. The next day, according to wiretap evidence, Rajaratnam told his personal Galleon trader, an unindicted coconspirator named Ian Horowitz, that he rushed to order hundreds of thousands of Goldman shares because he “got a call at 3:58 ... saying something good might happen to Goldman.”
Similarly, prosecutors assert, Gupta tipped off Rajaratnam after a Goldman board meeting the next month at which directors learned that the bank was projecting a quarterly loss of $2 per share rather than the $2.50 per share gain Wall Street anticipated. The Goldman board meeting took place after the market had closed, but as soon as trading opened the next day, Rajaratman dumped all of the 150,000 Goldman shares he held. Later that day, in a wiretapped conversation with a colleague in Asia, David Lau, Rajaratnam said he “heard yesterday from somebody who’s on the board of Goldman Sachs,” that earnings would be way off.
As assistant U.S. Attorneys Reed Brodsky and Richard Tarlowe conceded in their April 30 brief asking Rakoff to let in evidence from Rajaratnam’s wiretapped conversations with Horowitz and Lau, they need that evidence to tie Gupta’s calls to Rajaratnam with Rajaratnam’s subsequent trades. Ordinarily, Rajaratnam informing other people what he allegedly learned from Gupta would be considered inadmissible hearsay. But prosecutors said Rajaratnam’s statements fall under exceptions to the hearsay rule because (among other things) they were made to coconspirators in the course of an ongoing insider-trading scheme.
Gupta, they argued, should reasonably have expected that Rajaratnam would involve others at his hedge fund in the alleged conspiracy. The hearsay evidence, prosecutors asserted, is the only way for them to establish what was said in the unrecorded conversations between Gupta and Rajaratnam, since neither of them is talking.
The government does have a tape of one conversation between Gupta and Rajaratnam, but Kramer Levin argued — in a May 7 motion to bar prosecutors from playing it to the jury — that the tape doesn’t show Gupta giving Rajaratnam inside information. There’s also no evidence Rajaratnam made any trades based on the phone call, according to Gupta’s lawyers.
On July 29, 2008, Gupta and Rajaratnam talked for about 25 minutes, including a brief discussion about Goldman Sachs’ rumored plan to acquire a commercial bank. Prosecutors played the tape for the jury at Rajaratnam’s criminal trial last year, arguing that it showed Gupta breaching his duty as a Goldman director by disclosing confidential information. But Kramer Levin said in its new brief that Gupta was only telling Rajaratnam what Goldman had already told analysts.
Nevertheless, Gupta’s lawyers argued, prosecutors should not be permitted to play the tape because it’s impermissible “propensity” evidence that the government will twist to suggest Gupta’s guilt by association with Rajaratnam. Similarly, Gupta’s lawyers argued in a separate motion filed Monday that Rakoff should bar wiretap evidence of conversations between Rajaratnam and other conspirators that have no bearing on the accusations against Gupta.
“It appears that the government seeks to reprise the Rajaratnam trial in order to shore up its weak circumstantial case against Mr. Gupta, resorting to evidence about other companies and other alleged conspiracies,” the brief said. “The court should exclude these conversations because they lack even remote relevance to the conspiracy charged in the indictment and because they are extremely prejudicial, likely to focus the jury’s attention on matters outside the indictment, and likely to create the risk of a finding of guilt based on evidence of separate (and distinct) conspiracies.”
There are other clues to Gupta’s likely defenses in the government’s briefs, both the April 30 hearsay filing and a May 7 brief asking Rakoff for additional pretrial rulings. Prosecutors expect Gupta to argue that someone else must have told Rajaratman about Buffet’s $5 billion investment in Goldman, raising doubts about whether Gupta and Rajaratnam even spoke after the Goldman board’s conference call that day. Prosecutors also said Gupta’s lawyers may argue that Galleon’s last minute Goldman purchases on the day the board learned of the Buffet announcement were part of a broader market move in Goldman Sachs, suggesting that someone other than Gupta was spreading word of Buffet’s investment.
Prosecutors are also expecting Gupta to argue that, far from wanting to he help Rajaratnam, he actually bore a big grudge against the Galleon chief. According to the government’s May 7 brief, which asks Rakoff to compel the disclosure of privileged communications between Gupta and some of his civil lawyers, Gupta contemplated suing Rajaratnam for unilaterally redeeming money from an investment they held jointly. The government argued that Gupta’s anger at Rajaratnam in 2009 has no bearing on the 2008 conspiracy it alleges. It also asked Rakoff to bar defense arguments that Gupta is being unfairly singled out for prosecution.
Gupta’s lawyers haven’t yet filed what will likely be their most consquential brief, asking Rakoff to bar that all-important wiretap evidence from Rajaratnam’s conversations with Horowitz and Lau (neither of whom, incidentally, has been accused of wrongdoing by prosecutors). Rakoff has previously ruled that wiretap evidence is broadly admissible, but he has not addressed specific tapes the governments wants to play.
By the prosecutors’ own admission, the whole case may depend on what Rakoff decides.
Reporting by Alison Frankel; Editing by Eddie Evans